Question: Baseball player Robinson Cano is asking for salary arbitration on his contract. Salary arbitration in Major League Baseball works as follows: The player submits a

Baseball player Robinson Cano is asking for salary arbitration on his contract. Salary arbitration in Major League Baseball works as follows: The player submits a salary that he thinks he should be paid, as does the team. The arbitrator (without seeing the salaries submitted by the player or the team) estimates a fair salary. The player is then paid the submitted salary that is closer to the arbitrator’s estimate. For example, suppose Cano submits a $12 million offer, and his team submits a $7 million offer. If the arbitrator says a fair salary is $10 million, Cano will be paid $12 million, whereas if the arbitrator says a fair salary is $9 million, Cano will be paid $7 million. Assume that the arbitrator’s estimate is equally likely to be anywhere between $8 and $11 million, and the team’s offer is equally likely to be anywhere between $6 million and $9 million. Within $1 million, what salary should Cano submit?

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ANSWER To determine the salary that Cano should submit we need to consider all possible scenarios and the expected outcome of each scenario Scenario 1 ... View full answer

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